Loading the player...

What are 'Footnotes To The Financial Statements'

Footnotes to the financial statements refer to additional information provided in a company's financial statements. Footnotes to the financial statements report the details and additional information that are left out of the main reporting documents, such as the balance sheet and income statement. This is done mainly for the sake of clarity because these notes can be quite long, and if they were included, they would cloud the data reported in the financial statements.

BREAKING DOWN 'Footnotes To The Financial Statements'

It is very important for investors to read the footnotes to the financial statements included in a company's periodic reports. These notes contain important information on such things as the accounting methodologies used for recording and reporting transactions, pension plan details and stock option compensation information — all of which can have material effects on the bottom-line return that a shareholder can expect from an investment in a company.

Footnotes on financial statements serve as a way for a company to provide additional explanation of various portions of the statement. It functions as a supplement, providing clarity to those who require it without having the information placed in the body of the statement.

Information Contained Within Footnotes

Footnotes may provide additional information used to clarify a point. This can include further details about items used as reference, a clarification of any applicable policies, a variety of required disclosures, or adjustments made to certain values. While much of the information may be considered required in nature, providing all of the information within the body of the statement may overwhelm the document, making it more difficult to read and interpret by those who receive them.

The Use of Footnotes

Using footnotes allows the general flow of a document to remain appropriate by providing a way for the reader to access additional information if they feel it is necessary. It allows an easily accessible place for complex definitions or calculations to be explained should a reader desire the additional information.

Often, the footnotes will be used to explain how a particular value was assessed on a specific line item. This can include issues such as depreciation or any incident where an estimate of future financial outcomes had to be determined.

Footnotes may also include information regarding future activities that are anticipated to have a notable impact on the business or its activities. Often, these will refer to large-scale events, both positive and negative. For example, descriptions of upcoming new product releases may be included, as well as issues about a potential product recall.

RELATED TERMS
  1. Financial Statement Analysis

    Financial statement analysis is the process of analyzing a company's ...
  2. Financial Statements

    Financial statements are written records that convey the financial ...
  3. Income Statement

    An income statement is one of the three major financial statements ...
  4. Financial Performance

    A subjective measure of how well a firm can use assets from its ...
  5. Common Size Income Statement

    An income statement in which each account is expressed as a percentage ...
  6. Top Line

    A reference to the gross sales or revenues of a company, or an ...
Related Articles
  1. Investing

    Financial Footnotes: Reading the Fine Print

    Find out what could be hidden in the often-overlooked footnotes in financial statements.
  2. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  3. Investing

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
  4. Investing

    SEC Filings: Forms You Need To Know

    The forms companies are required to file provide a clear view of their histories and progress.
  5. Investing

    What are Financial Statement Assertions?

    Understand financial statement assertions and what they mean in accounting. For investors, it is important that assertions be accurate.
  6. Small Business

    What Disclosures Mean in Plain English

    Disclosures are the fine print in financial reports. Find out what they really mean and how they reveal the nature of relationships in research reports.
  7. Investing

    Look For These Red Flags In The Income Statement

    Companies can overstate their revenues and understate their losses to boost investor confidence. Learn how to spot the these red flags in income statements.
RELATED FAQS
  1. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
  2. What is the difference between a compiled and a certified financial statement?

    All publicly-traded companies are required to provide financial statements, including a balance sheet, cash flow statement ... Read Answer >>
  3. What does financial accounting focus on?

    Learn the main tenets of financial accounting, the guidelines by which it is governed and how outsiders use it to gauge a ... Read Answer >>
  4. What kind of financial reporting requirements does GAAP set out?

    Look at some of the major financial reporting requirements set forth by the generally accepted accounting principles and ... Read Answer >>
  5. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center